Real Estate Investments for a Secure Future

Monthly Archives: August 2012

As rents continue to rise and home prices continue to decline, the advantages of renting over owning is becoming ever narrower in many major metropolitan areas.

According to the latest data from Zillow, nearly 75 percent of the 200 metro areas it surveyed would see homeowners reach a “breakeven point” in three years or less. The breakeven point essentially refers to the amount of time a homeowner would need to live in a new home before the cost of owning become less than the cost of renting.

Despite these findings, the consensus seems to be that people are still scared to enter into homeownership due to a fragile economy. And financing is certainly tougher to come by these days. But that doesn’t mean homeownership isn’t gradually become a more viable financial option for the latest generation of renters.

Here’s a look at the top 10 cities where it makes more financial sense to rent:

CAMPBELL, CA-As parents across the country prepare to send their college-bound students to school this fall, many quickly find student housing can be a huge financial undertaking. So says a recent report from Realtor.com. Because of that, according to the site, some are now considering buying homes for their students to live in with classmates, while other potential investors are looking at college towns for rental properties that’ll deliver a steady stream of student tenants and profits.

“I’ve had parents of students get frustrated with the huge price tag on some of the rentals here in the Boston area and they found that it made more sense to buy a condo for their child,” says Willie Mandrell of At Home Real Estate in Boston, in a prepared statement. “Most recently I worked with a Boston University student and her parents purchased a two-bedroom condo in South Boston for her to live in while attending school.”

Darla Jobkar of Northwood Realty Services adds, “Because we’re home to almost 10 colleges and universities within a 10 mile radius of the Pittsburgh city boundaries, there has always been a shortage of housing for students. For this reason, college and university real estate investments in this area over the years have been a huge success to both long term and short term investors.”

Realtor.com also recently released its second annual round-up of college towns to consider when investing in real estate. Selected from the top 25 schools featured in a recent national report, 10 markets were chosen based on today’s average monthly rent prices compared to estimated mortgage payments of a median priced home in each city.

“In today’s market, many real estate investors aren’t necessarily the experienced short term investors of the past,” explains Errol Samuelson, president of Realtor.com. “In many cases, they’re average consumers interested in planning for their financial futures and they look to real estate as a longer term investment option. Rental properties in college towns can be a great option for some investors since schools can present a steady stream of renters that need housing.”

Tips for the Parent Landlord

Having a rental property can present challenges in many circumstances, so often investors hire management companies to deal with the day-to-day needs of renters, explains Realtor.com. “For parents whose tenants are their own child along with friends as roommates, setting up a business relationship can benefit both the parent and child. Tips include requiring the child and their friends to sign a lease agreement to guarantee a steady income each month while holding them accountable for condition of the property.”

According to Realtor.com, the lease should cover terms such as a designated day that rent is due, the security deposit and defines who pays utilities. “These terms will not only teach the students a valuable lesson, but will also protect the parent-landlord and child from a falling out among friends or other issues that can arise and jeopardize rental income.”

Portland based developer Ed McNamara is keenly focused on building green and achieving high levels of energy, water and other resource efficiencies. And he’s obligated by HUD and other public financing partners to rent at below-market rates.

His secret to building affordable high performance begins with an understanding of basic building science. “You start by trying to reduce the demand for energy with a tight envelope,” he says, using a systematic and computer-modeled assembly of structural, insulating, air-sealing, fenestration, and cladding components that reduce both air and moisture infiltration and thermal transfer. “That’s where you need to make the smartest decisions to get the most impact for your money.”

That reasoning applies to new buildings as well as existing ones. For its adaptive re-use projects, in which it transforms historic and iconic industrial/commercial buildings into modern multifamily, developer Village Green makes sure to address and improve the envelope first to reap downstream benefits.

“By nominally increasing the thermal value of the walls, we are able to reduce the HVAC equipment size by 5 percent or more,” says Shawn Zimney, V.P. of Development for the Farmington Hills, Mich.-based company. “That not only affords an up-front savings for the equipment, but also reduces our operating expenses later.”

The envelope is so important to McNamara that he doesn’t keep track of whether the system he ultimately installs carries a cost premium. “It’s just what you need to do,” he says, to achieve the 50 percent energy-use reduction he wanted for The Ramona, a 138-units rental property his Turtle Island Development company built in downtown Portland, Ore., where a studio apartment rents for about 55 percent of the market’s median and tenants enjoy monthly utility bills that are half of what they paid elsewhere. “It makes more sense to reduce the demand first,” before installing energy-efficient HVAC equipment and appliances.

Only after he settles on the envelope and calculates the proper size and highest performance possible for a few key mechanical systems does he turn his attention to indoor fixtures and finishes, what he calls “the gadget stuff,” such as solar and recycled-content surfaces that supplement his sustainability goals and message. “I’ll replace them in 10 years, and by then they’ll be more efficient, more available, and cheaper.”

The lack of mainstream investment in green, however, baffles McNamara. “Forget if you believe in the ecological benefits of green building,” he says. “It just makes good business sense for affordable housing to build something that lowers and controls my operating expenses and my turnover.”

As Millennials continue to flood the apartment market, building green will make even more business sense. “The fact that the property was built using green products and is equipped with energy efficient appliances and fixtures is extremely appealing to a potential renter,” says Zimney.

A study by Florida REALTORS® indicates that buyers from outside the country still favor the state when it comes to residential real estate. Foreigners are responsible for a fifth of Florida home sales.

Latin American and Caribbean buyers accounted for 35 percent of all foreign purchases in Florida, followed by Canadians, who represented 31 percent of the buying activity, and Western Europeans, who made up 22 percent of the volume.

Their favorite markets were Miami and Miami Beach by far, totaling 31.3 percent of all sales, with Fort Lauderdale coming in second with 11.6 percent. Overall, Florida REALTORS® calculated, foreign buyers spent $10.71 billion on homes in the state during the 12 months ended June 30, totaling 19 percent of all residential sales volume there.

Non-resident Canadians accounted for 31 percent of foreign purchases, down from 39 percent last year, but remained the No. 1 nationality to buy in Florida, the report said. Brazilians ranked No. 2, totaling 9 percent of purchases, up from 8 percent last year.

Some 82 percent of foreign sales were all cash, down from 86 percent in 2011, said the study. which noted many foreigners have trouble getting mortgages in the United States because of a lack of credit history. “Among recent foreign buyers in Florida, the use of mortgage financing was much less frequent than the overall national average,’’ the study said. “Overall, 17 percent of foreign buyers reported financing their purchase with a mortgage.’’ By contrast, 87 percent of U.S. homebuyers used mortgage financing, according to data from the National Association of Realtors.

Among Brazilians, 49 percent picked a place in Miami-Dade, with Fort Lauderdale emerging as their next favorite spot, with 18.6 percent share, the report said.

Canadians bought across the state, with the Bradenton-Sarasota-Venice area ranking as their favorite with a 14.4 percent share, followed by the Miami-Fort Lauderdale area with 12.9 percent, and Naples-Marco Island area with an 11.9 percent share.

Buyers from the United Kingdom totaled 5 percent of all foreign purchases, down from 7 percent in the year-earlier period.

Total sales volume from international clients is up nationwide, accounting for nearly 5 percent of all sales in the U.S. During the 12 months ended March 2012, foreign buyers spent an estimated at $82.5 billion, up from $66.4 billion one year prior, according to the National Association of REALTORS®.

Investors increasingly are eyeing college towns to snag properties at discounts and turn them into rental properties that could potentially offer steady cash flow with student tenants. But which college towns offer some of the best returns?

Realtor.com recently released its second annual list of the best college towns for investors, factoring in average monthly rental prices and comparing it to estimated mortgage payments of a median priced home.

The following are the top eight college towns for investors, according to this year’s report.

Back during the darkest days of the Panic of 2008, GSEs Fannie Mae and Freddie Mac received generous bailouts from the federal government, but at a steep cost: a 10 percent annual dividend payment from the two. Now the Treasury Department is changing those terms so that Fannie and Freddie need to pay whatever profits they make, rather than the fixed amount.

The GSEs weren’t always making enough to pay that 10 percent dividend, and so found themselves in the perverse position of borrowing periodically (from the Treasury) to pay the dividends. Going forward, when Fannie and Freddie lose money, they won’t be required to pay anything to the government. During recent quarters, however, the GSEs have been making money.

The move isn’t just to ease things for Fannie and Freddie. It also seems to be a strategy to hasten the time when the GSEs are “wound down,” because another change in the bailout terms stipulates that the two must reduce their portfolios by 15 percent a year—up from the previous requirement of 10 percent a year. In short, they need to unload their holdings more quickly, while at the same time can’t retain any of their profits, which sounds like a recipe for their eventual demise.

State unemployment inches upward

The Bureau of Labor Statistics reported on Friday—and got more attention than usual for it, because of the upcoming election—that regional and state unemployment rates were generally little changed or slightly higher month-over-month in July (“higher” is what the headline writers were interested in). There were 44 states that recorded monthly unemployment rate increases, two states and the District of Columbia that posted rate decreases and four states that had no change at all.

Nevada continued to record the highest unemployment rate among the states, a dubious distinction it’s had for some time, posting 12 percent in July. Rhode Island and California posted the next highest rates, 10.8 and 10.7 percent, respectively, and in fact those three states are the only ones that have double-digit rates any more. Because of the regional energy boom, North Dakota once again registered the lowest jobless rate, 3 percent.

Despite the monthly downtick in employment, year-over-year employment increased in 41 states and the District of Columbia and decreased in only nine states. The largest annual percentage increase happened in North Dakota (up 6.8 percent), followed by California (up 2.6 percent) and Oklahoma (up 2.4 percent). The largest year over-year percentage decrease in employment occurred in Rhode Island (down 1.6 percent), followed by Wisconsin (down 0.8 percent).

Leading indicators better in July

The Conference Board reported on Friday that its Leading Economic Index was up 0.4 percent in July to 95.8 (2004 = 100), which was a larger rise than expected, and coming on the heels of a 0.4 percent June decline in the index, but a gain of 0.3 percent in May. So the index is in something of a yo-yo mood.

Seven of the index’s 10 indicators increased in July, including weekly jobless claims and building permits, as well as the interest rate spread. The indicators that lost ground included the new-orders component of the IMS manufacturing index, along with consumer expectations for business conditions.

“The indicators point to slow growth through the end of 2012,” noted Conference Board economist Ken Goldstein in a press statement. “Lack of domestic demand remains a big issue. However, back-to-school sales are better than expected, suggesting that the consumer is starting to come back. Retail sales this time of year are often an indicator of how the holiday season will turn out.”

Gas prices creep skyward

Gas prices have been edging upward lately, inspiring worries that fuel costs will cause consumers to shop less, just when consumer spending made something of a recovery from its springtime slump. According to AAA, prices were up nationwide over the last month after dropping late in the spring and early in the summer.

According to Sunday’s AAA Fuel Gauge Report, the current average for a gallon of regular is $3.72. A month ago, the average was $3.447. Prices are still below the all-time highs of 2008, but are now higher than a year ago, when the average was $3.585.

Wall Street saw its own uptick on Friday, with the Dow Jones Industrial Average gaining 25.09 points, or 0.19 percent. The S&P 500 was up 0.19 percent and the Nasdaq advanced 0.46 percent.

Valley Forge, Pa.—As the multifamily industry continues to redefine what complete amenity package means, it is important to consider the function of a ceiling in different settings. While sound proofing is definitely a must inside units, there are certain applications where it makes sense to provide an environment with enhanced acoustics. Media and screening rooms, business centers, lobbies, clubhouses and demonstration kitchens could all benefit from a bolstered environmental acoustics.

CertainTeed Corporation has responded to the growing interest from architects and the design community for seamless wall-to-ceiling surface designs with the new family of Gyptone BIG Large Format Perforated Acoustic Panels. The line includes four products, each with a distinct pattern of perforations and acoustic backing tissue. Quattro 41 features a square perforation pattern, while Line 6 features line perforations. Sixto 63 and Sixto 65 each feature hexagonal patterns.

All of these panels are made with 80 percent post-consumer and 5-percent pre-consumer recycled content and can be fully recycled into the manufacturing of new gypsum products. The panels are suitable for direct or suspended screw mounting and can be easily painted with a short-nap roller to coordinate with your community’s particular design scheme. CertainTeed also offers a complete grid system and complementary Gyptone ceiling tiles for each BIG pattern, which provides a clean, monolithic transition between vertical and horizontal room surfaces.

For more information on CertainTeed’s full line of products, visit their website at www.certainteed.com.

New York—The Community Development Trust (CDT) recently was awarded $1.45 million from the Community Development Institutions Fund (CDIF) to preserve affordable housing. MHN talks to Joe Reilly, president and CEO of CDT about this award, as well as the state of capital for affordable housing across the country.

MHN: CDT was recently awarded $1.45 million for affordable housing. What does this mean for CDT?

Reilly: It’s the fourth award that we’ve received from the CDFI Fund. The total so far is about $4.7 million this year, and several of the years we’ve received the highest amount that was awarded to any of the recipients. This is a resource that would allow us to leverage private money and allow us to continue to buy a small balance of non-conforming multifamily loans—loans that might not fit into the main model—from CDFIs around the country, to help them provide liquidity. We buy those loans—some of them we hold, some of them we reposition, we syndicate some of them, we create mortgage-backed securities with some of them—but the key here is the opportunity on a national basis to provide liquidity to CDFIs that need to make more loans. They need to get some loans off their balance sheets, and we can buy those loans using these dollars from the CDFI Fund, leveraging those dollars with private dollars to create liquidity for them and hopefully generate the opportunity for more affordable housing debt to be originated.

MHN: How do you see the state of capital for affordable housing right now?

Reilly: I think that we’re certainly in a very challenging time, with regard to the resources that are available right now for affordable housing. The amounts available vary from state to state, and from region to region. Clearly many local municipalities are struggling, and the subsidies that they might have provided in the past are in some instances less readily available today than they might have been a few years ago. Though, in the field of affordable housing we’re working harder to gather the resources to make projects work.

MHN: What are some of the other challenges?

Reilly: In some instances the demand for low-income tax credits is less in some markets than in other markets, so in some very strong, high-profile markets—New York, Chicago, California—there is no shortage of investors for low-income housing tax credits. But those prices are a little bit less in some other markets. The challenges vary from market to market. In New York there’s probably more money available than in some of the smaller markets around the country.

MHN: What are some of the other projects you have coming up?

Reilly: We’re a hybrid REIT, so we own real estate as well as having loans on real estate. We own about 5,000 units of housing around the country and we have debt on 17,000 units of housing around the country—they’re all affordable. This year we have acquired two properties, and we have a commitment to buy a third. We should close in a month. We’re excited about those new acquisitions, and we’re confident they’re going to work well. Our role there is to invest in those properties and to facilitate the preservation of those properties as affordable housing, so we’re seeing some good opportunities on the equity investment side. We’re also seeing some opportunities to continue our work in loans from CDFIs from other sources. We’re working closely with Fannie Mae right now on a fairly large transaction, and we’re hoping we can bring that to a conclusion. That will probably happen in the next month or two. We’re proud of the work we do on a national basis, and we end up being in somewhat of a unique position here, to provide capital to CDFIs on the debt side, but also being available to invest in affordable housing at the same time.

For decades, Longwood has struggled to draw new shops and restaurants to its historic downtown, which is filled with moss-draped trees, brick streets and some of Central Florida’s oldest buildings.

But the city has had little success. Empty storefronts line Ronald Reagan Boulevard, and a recent consultant’s report called the area near the intersection of Reagan and State Road 434 “shabby and run-down.”

Now, with SunRail trains scheduled to start pulling into a new station in 2014, Longwood sees an opportunity to turn the 20-block area into a vibrant community that will lure riders to step off the commuter train and into the city’s core to shop, eat and even live.

Construction on the SunRail station is scheduled to start next month. When completed, the station will be just a stroll away from the picturesque district, known for its Old Florida buildings in the carpenter Gothic style of steeply pitched roofs and wooden siding.

“We have this great historic downtown, but we’re not getting the foot traffic,” said Sheryl Bower, Longwood’s community development director. “Many people just don’t know what this historic area looks like or where it is.”

The district, which is on the National Register of Historic Places, has more than three dozen structures built in the 19th and early 20th centuries, when Longwood was a growing hamlet that drew visitors traveling by rail between Sanford and Orlando. The buildings include the 1886 Longwood Hotel, now an office building, and the 1879 Christ Episcopal Church.

Longwood is not planning to develop the area itself. Instead, city officials hope the charm of the buildings, along with an influx of visitors from SunRail trains, will lead to private developers’ investing in new coffee shops, eateries, offices and apartments. The new business couldlead to an increase in property-tax revenue that could be reinvested in the district, said Commissioner Joe Durso.

“It’s going to take some time,” Durso said. “This is a long-term process. … But we’re trying to pre-plan as opposed to post-plan.”

To get started, city officials are improving drainage around the station site. They’re also:

•Easing regulations to make it easier for developers to build multistory buildings that would have shops on the ground floors and residential units and offices on the top floors. The new regulations would extend to the area around South Seminole Hospital, which is just west of the historic district.

•Upgrading the city’s 6-acre Reiter Park on Warren Avenue near the district by building an amphitheater and playground and revamping basketball and tennis courts. The city plans to spend $1 million and has applied for a $500,000 state grant.

•Working with a developer to build a mixed-use complex next to the SunRail station that will accommodate apartments, offices and shops. The city would help pay for sewer and drainage costs.

The long-term vision calls for erecting decorative street signs leading visitors into the historic district; adding bicycle and pedestrian pathways; widening sidewalks; requiring that new buildings be closer to the street to promote an urban “feel”; and adding on-street parking along Reagan Boulevard, also known as County Road 427.

“I’m really optimistic that the train will encourage people to come into our historic downtown,” said Pamela Redditt, owner of the Cottage Gift Shop on West Church Avenue. “It will be nice to have a mix of professional offices and retail and eating establishments here.” Her shop is within the 1870 Inside-Outside House, named for its odd construction featuring support studs on the outside.

“The economy is absolutely a hurdle at this point,” he said. “But we feel that the decline in property-tax revenues is starting to level off. The increase in unemployment has slowed. And there are signs that things are starting to turn around. In the next decade, things will look a lot better. So Longwood is taking steps to prepare for that time now.”

Durso said he hopes the new SunRail station will turn Longwood’s historic core into a “livable and walkable” community similar to Orlando’s Baldwin Park or Thornton Park soon after the $1.2 billion commuter train starts running in May 2014.

“We want to be one of the stops that riders will want to make it a point to get off and want to walk around and go to a restaurant or go to shops or even go to City Hall,” Commissioner Bob Cortes said. “We don’t want them just riding past Longwood.”

Rent growth has slowed since last summer in multiple cities across the country, according to new data from Dallas-based Axiometrics, Inc.

National rent growth from May to June was 0.52 percent, compared to 0.76 percent for those months in 2011. Axiometrics cites weak job growth as the reason.

“We will soon know if this is just a one-month blip or if it looks like there will be further softening in the second half of the year, though by historical standards we are still in a strong effective rent growth market,” said Jay Denton, vice president of research for Axiometrics. “Multiple scenarios could play out over the coming months, leading to end-of-year growth rates anywhere from just under 4 percent to as high as 4.7 percent. Much depends on job growth, as well as on new unit deliveries, which are really starting to ramp up.”

Indeed, the first “significant” amount of new supply is beginning to hit the market right now. During the second quarter of this year, 17,718 new units were delivered. But at the end of July, there were a total of 1.2 million units in the construction pipeline. So there is still plenty more inventory waiting to be introduced in the coming years. During the third quarter alone, there is expected to be 25,534 new units delivered, and that number is projected to jump to 28,406 during the fourth quarter.

San Francisco remains way ahead of other markets in terms of rent growth for Class A and C properties, at 18.5 and 17.8 percent, respectively. The city also leads for Class B rent growth at 9.3 percent, ahead of Denver and Nashville, which both showed 7.1 percent.